I’ve labeled the International Monetary Fund as the “dumpster fire” of the world economy.
I’ve also called the bureaucracy the “Dr. Kevorkian” of international economic policy, though that reference many not mean anything to younger readers.
My main complaint is that the IMF is always urging – or even extorting – nations to impose higher tax burdens.
Let’s look at a fresh example of this odious practice.
According to a Reuters report, IMF-supported tax increases are provoking economic strife in Pakistan.
Markets and wholesale merchants across Pakistan closed on Saturday in a strike by businesses against measures demanded by the International Monetary Fund…
Markets and wholesale merchants across Pakistan closed on Saturday in a strike by businesses against measures demanded by the International Monetary Fund. …Prime Minister Imran Khan’s government..is having to impose tough austerity measures having been forced to turn to the IMF for Pakistan’s 13th bailout since the late 1980s. …Under the IMF bailout, signed this month, Pakistan is under heavy pressure to boost its tax revenues.
I’m not surprised the private sector is protesting against IMF-instigated tax hikes.
We see similar stories from all over the world.
But what really grabbed my attention was the reference to 13 bailouts. Good grief, you would think the IMF bureaucrats would learn after five or six attempts that they shouldn’t throw good money after bad.
That being said, I wondered if the IMF was pushing for big tax hikes because they had demanded – and received – big spending cuts in exchange for the previous 12 bailouts.
So I went to the IMF’s World Economic Outlook Database to peruse the numbers…and I discovered that the IMF’s repeated bailouts actually led to big increases in the burden of spending.
The IMF’s numbers, which go back to 1993, show that outlays have tripled. And that’s after adjusting for inflation!
Looking closely at the chart, I suppose one could argue that Pakistan was semi-responsible up until the turn of the century. Yes, the spending burden increased, but at a relatively mild rate.
But the brakes definitely came off this century. Enabled by endless bailouts from the IMF, Pakistan’s politicians definitely aren’t complying with my Golden Rule.
I’ll close with one final point.
The IMF types, as well as others on the left, actually want people to believe that Pakistan should have a bigger burden of government spending.
According to this novel theory, the public sector in the country, which currently consumes more than 20 percent of GDP, is too small to finance the “investments” that are needed to enable more prosperity.
Yet if this theory is accurate, why is Pakistan’s economy stagnant when there are prosperous jurisdictions with smaller spending burdens, such as Hong Kong, Singapore, and Taiwan?
And if the theory is accurate, why did the United States and Western Europe become rich in the 1800s, back when governments only consumed about 10 percent of economic output?
This video tells you everything you need to know.
International Liberty 
[…] It is disappointing that the bureaucrats at the International Monetary Fund routinely advocate for higher taxes and bigger government in nations from all parts of the world (for examples, see here, here, here, here, here, and here). […]
[…] But I periodically write about nations such as Jordan, Cyprus, Latvia, Vanuatu, Panama, and Pakistan because they offer important lessons – mostly negative, but sometimes positive – about […]
[…] That’s true in South Asia. […]
Solution to Pakistan Imports/Trade deficit
The burgeoning Pakistani import kills the PKR (due to deficit and FX timing of flows in the spot cash and IBR market) and is a drain of FX earnings
But the solution is simple – just 5 steps.dindooohindoo
Step 1 – Ban all luxury imports
Ban all luxury imports,like the destruction of wine and alcohol cedars by Babar,in his conquest of Hindoosthan – as a moral proxy for the jehad in Kashmir,and the character required,to support the Kashmiri freedom struggle against Hindoo oppression.Within that,Liquor,Tobacco,Intoxicants and Cosmetics are easy for a Muslim and would appeal to the common Pakistani (as a sacrifice made by the Rich Pakistanis – in terms of abstinence)
Next are pristine luxuries – watches, cell phones,jewellery,cars and expensive bikes etc – which are really not required at this juncture.,Imports of Liquor etc can be allowed only for Diplomats and Foreign tourists in quotas renewed each year – and imported by CANALISED IMPORTS by Pakistan PSU only.(Embassies,in any case,can import free of restrictions under UN conventions)
Lastly, are autos.There is no need for people for import cars/bikes,if they already have 2 vehicles. So A TBT can be imposed that a certificate is sought on number of vehicles by actual user – at the time of remittance.Some people will use drivers names to import autos – so better to ban them outright.
At a later stage, sole manufacturing and assembly rights can be given to a few licensees to make these items in Pakistan so that the cost of power,labour and some materials are in PKR and the profits are retained for some time,so that some FX is saved,and the rest is postponed.
Most Asian nations are sitting on unused capacities and so low capital goods imports is not an issue,in any case
Step 2 – Restructure Imports paid by Inter bank route
For all imports paid by “inter bank route on CAD or DA” – shift it to LC mode on usance mode (from the Pakistani importer bank).The problem is that some importers may be making small imports and so the cut off limit by value, of imports by amount,can be set.The objective is to roll over the LC payments,as far as possible – so that the date of USD outflow is deferred,for the Pakistan banking system.
If cost of LC usance (on life cycle mode) is high – the importers can use SB LCs to secure the suppliers (who will discount the drafts on Day 1) and the rollover financiers.
As a result,the Pakistani importer will have surplus cash in that period and some importers will divert it – so that cash has to be blocked/liened by the bank on the date of the 1st date of rollover.During the tenor of the LC rollover,the FX position has to be hedged as a mandatory rule and the cash invested in safe T- Bills or Short dated GSecs,to finance the cost of the FX covers.
The importer wil earn a treasury profit,and will have time to fine tune the date of crystallisation of the FX rates on the date of remittances – vs using the IBR TTSR,as of today.In the alternate – Blue chip entities (in terms of ethics) can use the cash surplus of the LC,to discount supplier bills (whose deemed cost of capital is 25-30% per annum) with significant margin improvements for the importer and the suppliers
There is no dearth of banks who will roll over Pakistani LCs of 1st class banks (In Dubai/London/EU/New York. .For Non 1st class banks – some Pakistani Top rated bank or Foreign bank in Pakistan can add confirmation of the LC.LCs can by creative tools be rolled over – forever – till Jesus returns to earth.Some Hedge Funds also might also do it,as it is safe bet with a yield ,way over the USPR.
This will avoid squeeze of USD in the IB markets – data about which is known to bankers,and so is also known to speculators and then the grey market.It affords flexibility in pushing out USD payments at various points of time – and can be restricted at any time by the SBOP.The Uncertainty in the SBOP policy on rollovers will ensure that the market is unaware of the CRYSTALLISED FX Liability on ANY DATE for the banking system (as there will never be a CERTAIN CRYSTALLISED DATE)
So no punter will be able to speculate in the FX market,as the SBOP can change the crystallised liability on any date (unless the SBOP leaks the data) and the date of CRYSTALLISATION CAN BE CHOSEN IN SOME CASES, WHEN THE PKR HAS APPRECIATED
For large importers in Pakistan importing on 90 – 120 days clean credit for many years on a regular basis – factoring and forfaiting limits can be set up in Dubai/London etc., to make the suppliers draw bills of exchange (drafts) for the rollover period of say 180 days or 270 days,which are accepted by the Pakistani importers.The drafts can be factored or forfaited by overseas financiers,with recourse to the importers (at say LIBOR + X points) and with recourse to suppliers (at a lower rate). The Risk is that the Pakistani importer signs the draft and disappears with the money (for the companies with doubtful ethics).In such cases,the importers bank can co-accept the drafts (and block or lien the importer funds)
In the alternate,if the supplier cost of capital is lower, the supplier can “extend longer credit based on SB LC” issued by Pakistani importer (banker) and then “keep rolling it over” – based on “effective rates and arbitrage”
Step 3 – Grey Market Imports
This is the market where “no import duty is paid” and the USD is bought in cash “in advance” in Karachi or HK or Guangzhou. None of the imported items are necessities – denial of which will lead to death of the user.Some portion of the imports are made by baggage imports by air – which is an evil,which can be overlooked.
Speculators take advantage of the squeeze in the interbank and the DEMAND of these grey market imports,to play havoc in the spot market – which hits the headline on the newswire.
The solution is to identify say “500 high value imports by Tariff codes” and BAN Them – and direct only imports vide canalised imports from Pakistan PSUs (called,say SOPSU) with liaison offices in Dubai,HK/Singapore/Guangzhou/Shanghai.The Pakistani importers can identify their supplier and cargo – the chinese supplier will raise the bill on the SOPSU,who will stamp it as accepted – after the Pakistani importer has accepted it – on a back to back basis.The SOPSU will accept it after the Pakistani importer has deposited the PKR in Pakistan,with the SOPSU.
The Chinese importer will take the SOPSU accepted bill to any Chinese bank and get the money. Of course, now the money is “on recprd and liable to Chinese Tax”.However,in Foshan,Chengdu,Dalian,Shanghai,GZOU there are many Chinese financiers,who can discount a draft endorsed by a chinese and PAY IN CASH (with no questions) so long as the drawer has no restriction/objections.
Surely,some Chinese and Pakistanis will start “printing SOPSU acceptances” – SO THE SOLUTION IS TO DIGITISE ALL LIVE ACCEPTANCES and UPLOAD THE SAME,for all discounters to be aware of it (and this is to be printed on the acceptance)
The SOPSU will pay the Chinese banks on deferred payments (after 6/12/18 months) at the pegged rate,on date of acceptance plus interest.
This will take out all the Spot cash USD-PKR demand,in Karachi/HK/Dubai.
Next,it is the Pakistani importers turn to take delivery from the Chinese after receipt from the Chinese banker – and clear it from Pakistani customs
the way he wants (as he is doing today).It is easy to know that the chinese exports recorded from chinese ports do not reach (on paper) the stated ports of import in Africa,West Asia,East Asia and South Asia – so the Pakistani trader can operate the way he wants.
The other way is that the SOPSU can canalise all the logistics in BULK by booking containers with Shipping lines and get much lower freight rates.Some Chinese and other flag carriers with Old Ships and Containers can be used to cut down the freight – where the containers are on the last voyage to the Karachi scrapyard etc. In such cases,the imports will be on record – so the importer will pay only the DEEMED DUTY (bribes) which he is paying currently + freight saved.Since the State has wiped out the hawala and FX punters and launderers, the duty can be lowered to the level of the DEEMED DUTY + freight saved ,as the corruption in Customs is wiped out,FX is controlled and all FX racketeering is wiped out.
Most importantly, since the Pakistani importer has paid the import amount in PKR to the SOPSU on Day 1, the SOPSU will earn interest in PKR,for say 36 months at 20% per annum – which is 30%,and might close out the import financing on a date,wherein the PKR has appreciated (w.r.t the date on Day 1 – as the SOPSU would know the intervention plans of SBOP).For exporter nations,where there is no currency peg w.r.t the USD, the SOPSU will need to hedge the exposures (but the cost will be far below the Treasury gains)
Step 4 – Making Exporters pay for Pakistan Import Duties and FX mismatch (defacto basis)
W.r.t the “indusrial raw materials” legally imported by entities in Pakistan – the imports are “scattered and in small lots” based on “JIT concepts” – and the suppliers are loading “country,price (exchange traded) and credit risk” in the price
These imports should be canalised by a SOPSU whose sovereign status will ensure that there is no country and credit risk in the price.In addition ,since purchases can be be aggregated on a BULK shipment,and ALSO for a LONG TENOR, THE BENEFITS OF STRATEGIC SOURCING WILL ACCRUE. For LME/CBOT/NYMEX/DALIAN/SME products,price formulas and hedges will TAKE OUT THE price risk BUILT INTO THE PRICE – and could reduce the price sharply, in some cases.
If required,the SOPSU can issue a SB LC or a comfort letter,for purchases for 12 months and identify bankers in London,who will provide pre-shipment credit to the exporter of the industrial material (w/o recourse to the SOPSU)
Long term contracts will reduce costs of affreightment.
Then the SOPSU can find bankers to roll over the financing of the purchases,for 12-18 months,with the supplier getting payment on BL SOB.
This will save 15- 25 % in purchase costs and the SOPSU would have deferred the FX outflow with treasury gains,and the BL can be endorsed
to the pakistani user on High seas,or the SOPSU can clear the cargo and sell it to the user
In essence,the cost of the supply chain to Pakistan,is lowered by 20%,and the FX out flow is pushed out by 18 months,and there are treasury gains.The Pakistani user can pay the SOPSU, the way he is paying in the existing mode.
W.r.t the industrial raw materials illegally imported (w/o duty or misdeclaration) by entities in Pakistan – the imports are scattered and in small lots
based on JIT concepts – and the suppliers are loading country and credit risk in the price and THE PAKISTANI IMPORTER IS PAYING ON CASH DOWN MODE (in USD) AS THESE CARGOS ARE MISDECLARED – AND SO,THE CARGO IS INSURED AS X WHEN IT IS Y,AND WITH A VALUE OF A WHEN THE VALUE IS C .
These imports should be canalised by a SOPSU,AS ABOVE, AND THE SAVINGS CAN BE OFFERED TO THE IMPORTER AND HE CAN ASKED TO PAY THE SAME AS IMPORT DUTY.THIS WIPES OUT CUSTOMS CORRUPTION AND ALL HAWALA IN THIS TRADE and ACCRUES REVENUE TO THE STATE. THE IMPORTER WILL PAY THE ENTIRE AMOUNT ON DAY 1 (AS HE IS PAYING TODAY) AND THE SOPSU HAS A ROLL OVER PERIOD OF 18 months,with huge treasury gains and possibility of closing out the trade at an appreciated PKR
Step 5 – Crypto
Pakistani IT experts can tie up with some Chinese engineers to “start a Crypto” for Arabs,Bangladeshis,Lankans and Pakistanis working overseas for their remittances and student fees.This Crypto can be used by DIE HARD PAKISTAN smugglers for payments to suppliers – so that the PKR:USD is not pressured AT ALL FOR GREY MARKET IMPORTS.
The Crypto Algo can be altered,to delete forensic trail,after a certain layer.
Solution to Manufacturing in Pakistan – Part 1
Some people lament the “lack of manufacturing capacities” in Pakistan.Had the Pakistan state pushed for manufacturing capacities a few decades ago – it would have had the “NPA disaster of the Hindoo Nation”.The Aggregate of the NPA in the Banking,NBFC,CHit fund,Co-operatives and Unorganised sector,in Hindoosthan,would be around USD 300 billion USD (at the minimum) – which is enough to destroy Hindoosthan. An Oil shock or a 15 day full-scale conventional war,will destroy Hindoosthan – simply by the “geometric expansion of NPAs” and the “physical annihilation of manufacturing”,in North Western Hindooosthan.dindooohindoo
History
There was no point in manufacturing in SAARC, a few decades ago, as everything was being sold by PRC,at half the total cost of the importing nation,and there was no skilled labour and management expertise in nations like Pakistan,at that point of time.The costs in PRC have now matured and stabilised and the tastes of the Pakistani consumer have stabilised and matured.
Current Tenor
The situation is ripe for manufacturing in the current times – with the benefit of obviating FX outflows and smuggling and boosting indirect tax revenue.
Exanple of “As-Is” Import
Let us assume that a product is being imported at a cost of USD 1000/piece or per ton CIF,with the Tariff rate of say 35% – wherein the actual compliance with duty,is only 10%.In this case,the profit which accrues to the trader or maker o/s Pakistan is not taxable in Pakistan,and the same applies to the sea freight and the freight forwarder’s commission.Since, the CIF cargo is misdeclared at Port Qasim – it is obvious that the sale of the said item,in the wholesale and retail market,would be w/o tax.
Exanple of “Proposed” Manufacture – Case 1
If the said item is made in Pakistan, the Marginal cost would be say,650 USD and the Total cost (including non cash and amortised costs) would be around USD 900. However, the manufacturer would need to import the materials or the item/component in CKD/SKD condition.Since,this will be a bulk import,in industrial packaging,it would be at a lower cost,and the importer would pay the merit duty applicable – as there will be no duty evasion,no smuggling, no corruption, no hawala and the
USD outflow can be deferred.
The indigenous cost in Pakistan such as salaries,purchases and power – would be subject to indirect and direct tax (and TDS) which cannot be avoided.In addition,the power consumption will provide a proximate estimate of the actual production of the factory.
If the manufacturer has paid the import duty on material imports and has no captive DG set for power – then the sales of the products will have to be on record.Let us say that this factory is in State X , and he sells to a dealer in state X at the 1st point.Ideally the states should have a 1st point tax – and then all sales in the same state of the “said invoice” (of the 1st point of sale) will be exempt from indirect tax.If tax is at the last point – then that last point will never come and the Revenue deptt will keep on doing reconciliations.If there is a multi-point tax,there will be avoidance (as no one will pay tax on financial value addition),and the state will have to prove the sale at each
point.So full indirect tax revenue will be realised on the mode of “1st point tax”.In any case, the factory will have all the data w.r.t the last point retailer as part of its CRM and its Dealer/Retailer incentives and Dealer management plans
Exanple of “Proposed” Manufacture – Case 2
If the manufacturer decides not to import the materials and purchases the same from local sources (who are the illegal importers) and does not use Grid Power or does not use metered Grid Power – the he would sell the products “off the record/books”.However,in this case, there will at least be some manufacturing in the state and the FX outflow would be “far lesser than before”.
Fiscal Levy Model in Exanple of “Proposed” Manufacture – Case 1
In the 1st case, the state should levy the import duty on the material or component imports,in a manner,such that the total taxes accrued to the state,across the supply chain of the manufacture for the unit,and its extended supply chain and staff = 35% (which was the original import duty on the finished product)
In other words,the aggregate of the understated components, as under:
Import duty on material/component import
Tax of staff salaries of factory
Indirect tax on local purchases
Cess and Duties on SEB power purchases
Tax on sale of Products
Profit tax on producer and supplier of local purchases
Cross Subsidy benefits to state on SEB purchases
Should be around 35% of the finished goods price (NSR),which was the original import duty on the finished product
Fiscal Levy Model in Exanple of “Proposed” Manufacture – Case 2
In this case,for those products where there is no “on record manufacturing” in the nation, an import duty on materials equal to current deemed duty (hawala charges bribes and the actual duty paid) plus a small premium,can be imposed, to bring the downstream sales of the finished products into the indirect tax net (on the mode of the 1st point sales tax).Once the imported materials are “on record”,then the “downstream production” will also be on record.
However,if the production is viable only by power theft,avoiding pollution taxes,doing hazardous manufacturing and evading the indirect taxes on sale of finished products – then the said production can be shut down – by licensing the production to the original manufacturers on a sole license basis with direct tax holidays.
Alt Manufacturing Strategy
In the Alt, based on import data from Pakistani ports and the export data from load ports, if the overseas manufacturers or traders are offered “sole manufacturing and sales rights”, in Pakistan or parts of Pakistan (by law or by banning imports or charging high duties/TBT etc.), the overseas suppliers will be glad to set up or partner with,local partners to set up manufacturing capacities,for all types of consumer goods (at the minimum)
In addition, there will be several types of manufacturing which overseas suppliers/bankers/ entrepreneurs will be glad to outsource to Pakistan on account of pollution effluents, environmental issues,hazardous chemicals,requirements of water,obsolete or phased out technologies in USA/EU,labour intensive technology,2nd hand machinery on the books of cash strapped banks etc – who will be glad to relocate to Pakistan.
Export Interface
It would be reasonable to assume that the “VA norms” of various trade treaties applicable to Pakistan,would qualify the COO of these manufactured products,as Pakistani and thus,would qualify as “Nil Duty/Concessional Duty access” to export markets (even ignoring, the financial value addition)
The manufacturing hubs of the abovesaid products can be located near Ports and also near the SEZ/EOU and within the DTA of the EOU (to lower logistics costs) – so that the manufacturers can offload excess capacities to SEZ and EOU on CMT/Job work or where the suppliers manufacture semi-finished products which are sold to SEZ and then exported – and this is treated as a Deemed/Physical export for the DTA Manufacturer
[…] wrote just two weeks ago about the IMF’s multiple bailouts of Pakistan, the net effect of what have been to subsidize […]
There’s an ENORMOUS difference between austerity for the government and austerity for citizens. When the government talks about austerity, it never means austerity for itself, it only means austerity for its citizens, which ends up as government failure. see:
www.lifestrategies.Net/austerity